Column: Trump’s China tariffs will hit these start-up companies hard, and you’ll pay the price

Reporting from Carlsbad, California —  Since taking over in 2011 as chief executive of JLab Audio, a maker of consumer wireless audio products, Win Cramer has been almost constantly on the road.

Normally, his itinerary would involve touching base with retailers to persuade them to keep his company’s mass market-priced earbuds, headphones and speakers on their shelves. But two weeks ago he detoured to Washington to explain to the U.S. trade representative’s office how President Trump’s plan to place 25% tariffs on $200 billion of products imported from China could deliver a catastrophic hit to JLab.

“It was the biggest moment in this company’s life,” Cramer told me.

He wasn’t alone. The Aug. 21 hearing was one of six sessions at which a USTR committee heard 250 witnesses. That day, Cramer was given five minutes to testify at a hearing that spanned seven hours. Of the 57 business executives and industry advocates who spoke, only 10 favored the tariffs.

Like many of his fellow witnesses, Cramer described the tariff proposal as an economic vise from which his privately held company, which was founded in 2005, can’t easily wriggle free. No other country offers the expertise or experience in manufacturing the products JLab sells, or the shipping connections the company relies on to get its wares to the U.S.

Most of the attention devoted to Trump’s trade war with Mexico, Canada and China has focused on its impact on the so-called Rust Belt, the industrial and agricultural Midwest. Economists assert, however, that tariffs won’t bring those jobs back, and farmers meanwhile have to shoulder the cost of retaliatory tariffs on their exported soybeans and other produce.

The effect of Trump’s tariffs on U.S. consumer companies that manufacture their goods in China for domestic import hasn’t received nearly as much attention. The impact is shaping up as a direct hit on the California economy for two reasons. One is the state’s vibrant trade with the Pacific Rim, which has helped make the ports of Long Beach and Los Angeles the nation’s busiest container ports. The second is the state’s position as a hive of innovation in electronics.

California accounted for more than $440 billion in U.S. imports last year, or an outsized 18% of the U.S. total. More than one-third of those imports came from China, the state’s largest import partner, with Mexico a distant second at 10.5%. Six of the state’s top 10 import categories were electronic products.

All except the largest electronics companies offshore their manufacturing, mostly to China, because the necessary capability simply doesn’t exist in the U.S. Conceivably, manufacturing could shift here over time. But given the time frame of Trump’s trade policy, with the president reportedly poised to announce the latest round of tariffs as soon as the comment period ends Sept. 6, there is no time.

“These companies based their business models on an existing infrastructure,” says Sage Chandler, an international trade expert at the Consumer Technology Assn. The CTA represents companies as large as IBM and Intel, but Chandler says about 80% of its members are small businesses dependent on a supply chain in which China is a crucial link.

So far, there hasn’t been much succor for companies caught in the trade crossfire. Immediately after learning how the tariffs might affect JLab, Cramer wrote all his local members of Congress and California’s two senators, Dianne Feinsein and Kamala Harris. He got no replies. A company-wide letter-writing campaign yielded a form letter from Feinstein’s office that addressed a completely different issue, as though plucked from the wrong file folder, and some outreach from the office of Rep. Scott Peters (D-San Diego), which Cramer hopes will bear fruit after Congress returns to work next month.

What has blindsided many U.S. companies is the speed with which Trump’s trade war with China leaped from rhetoric to action. The administration announced the first tranche of tariffs June 20, with an effective date of July 6. These were directed largely at $34 billion in industrial components. After China announced a round of retaliatory tariffs, Trump played tit-for-tat, expanding the initial list by an additional $16 billion.

In early July, the list metastasized to a dizzying 6,031 product categories worth $200 billion, which were to be subject to 10% tariffs. The expanded list included consumer products of almost every description, along with foodstuffs, textiles, minerals, chemicals and industrial materials. Cramer’s first inkling that his company was affected came as he read the news on his cellphone in the Minneapolis airport, fresh from a meeting with one of his lead retailers, Best Buy. On Aug. 2, the proposed tariff rate was raised to 25%.

Cramer estimates that 80% of his products would fall within classifications subject to the higher tariffs. The consequences could be dire, including layoffs among the company’s domestic staff of 40. As for consumers, he observes, the tariffs will flow to the bottom line, becoming a tax on them. They’ll feel these tariffs more directly than the earlier tariffs, which mostly hit big-ticket items like major appliances.

“A washer/dryer you might buy once every 10 years,” he says. “But when you talk about consumer products, you see them every day. If you’re going from $100 to $125 for a basket of goods, that’s a big increase.”

Among Cramer’s greatest fears is that he’ll have to increase his wholesale prices to cover the tariffs, which could prompt retailers to raise their prices. His bigger competitors, such as Sony, JVC, and Apple’s Beats, have flexibility to absorb more of the costs. As a result, the price difference between their goods and his products, which range in price from $20 to $149, could shrink.

“About 80% of my product line comes under the tariffs,” he says. “For them it might be 10%. This could give them an opportunity to get back market share at my expense.”

Other California consumer electronics companies face related issues. The first report of 10% tariffs came just after San Mateo-based Brilliant had set the launch prices for its introductory product line of home automation devices, which hasn’t yet started shipping. The company informed its retailers, mostly homebuilders and home installers, that every product would be raised in price by $50. A two-switch control panel went to $349 from $299, for instance.

But the firm, which sources all its manufacturing in China, is loath to raise prices again to absorb a 25% tariff, according to Aaron Emigh, its co-founder and CEO. “We want to be a mass-market product,” he says. “Our mission is to put the smart home in everybody’s reach, not to be in the luxury segment.”

Emigh has begun to sign up members for a grass-roots group he called Startups for Sensible Trade — of its initial 14 members, eight are located in California. His pitch is that tariffs like Trump’s can only hamper the growth of technology start-ups like his own, with a potentially devastating longer-term impact on innovation and high-wage job growth.

Beyond the headlong rush to confrontation, the hallmark of Trump’s trade war with China seems to be dishevelment in strategy and goals. Trump’s team doesn’t appear to express a single consistent policy.

The confusion may be born at the top. Trump, Chandler says, “waxes nostalgic for beautiful factories from the 1950s.” But that’s an image divorced from the realities of modern manufacturing, which probably can’t be returned to halcyon days of fully domestic, manual assembly lines. “The expectation that you’re going to see more workers employed” by raising the prices of imported Chinese goods, she says, “is probably not very well-informed.”

The most oft-cited goal of Trump’s trade war is to punish China for stealing American intellectual property and to goad it to behave. But many of the companies caught in the net don’t have IP at risk.

JLab, for instance, employs technologies that were either developed in other countries or are today considered off-the-shelf. That includes Bluetooth wireless, an open standard originally developed by the Swedish company Ericsson in 1994.

Some companies swept up in the tariff dragnet are resolutely low-tech. That’s the case with MSI, an Orange-based distributor of flooring, countertops and tiles that sources much of its inventory as raw materials from China, for sale to homebuilders and do-it-yourself stores like Lowe’s.

“Granite countertops are driven by color and determined by geography, and Chinese granites have a particular look and price point,” says MSI’s president, Rupesh Shah, who also testified Aug. 21. As for the ceramic and porcelain mosaics his firm distributes, U.S. manufacturing is unlikely to expand to replace the 650 million square feet produced in China — about 40% of the total U.S. demand.

Imposing a 25% tariff on those products would mean a sharp halt to MSI’s ability to expand and might mean layoffs among its workforce of more than 1,800, spread among its 26 warehouses nationally. Since installing flooring and slab countertops is labor intensive, it would shrink opportunities for housing construction workers, especially at the entry-level market segment served by Chinese materials. “I’d call it a doomsday scenario,” Shah says.

Because the latest round of tariffs is still under discussion, no one has yet paid them. That doesn’t mean they haven’t imposed costs. Speaking in his Carlsbad office amid shelves of the powder blue boxes in which JLab’s products are packaged, Cramer explained the company has accelerated its orders to build up tariff-free stock for the coming holidays. (The tariffs, once finalized, will be imposed on any product not already cleared through customs.)

But that requires capital, as does early ocean shipping — at rates that he estimates have risen by 15% over their normal seasonal rates, because many other manufacturers are taking the same steps.

For all of Trump’s promises that America is destined to win his trade wars, for start-ups the harvest seems more likely to be bad — a longer path to profitability and less access to investment capital when it’s most needed.

“There is a ripple of consequences,” Emigh says. “Brilliant is well positioned, but other companies may never get a chance to prove what they’re capable of. There will be companies that go out of business because of this.”

This column is one of a series on the conflicts between California and the Trump administration. Feel free to send comments or ideas to [email protected].

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